US Senators Call for Investigation into Firms’ Role in Puerto Rico Debt Crisis

SAN JUAN — While Massachusetts securities regulators are reportedly investigating three investment companies that sold mutual funds chock-full of Puerto Rico bonds, a group of U.S. senators sent a letter Tuesday to Mary Jo White, chairwoman of the U.S. Securities & Exchange Commission (SEC), calling for an investigation into the role played by investment firms on the island’s debt management.

SEC Chairman Mary Jo White (Photo by Mark Wilson/Getty Images)

“Puerto Ricans deserve to know whether illegal activity contributed to the current debt burden,” reads a letter signed by Sens. Charles Schumer (D-N.Y.), Elizabeth Warren (D-Mass.), Bernie Sanders (I-Vt.), Bob Menéndez (D-N.J.), Kirsten Gillibrand (D-N.Y.), Richard Blumenthal (D-Conn.) and Jeffrey Merkley (D-Oreg.).

The group of senators is asking the SEC “to investigate any possible misconduct by financial advisors to municipal entities in Puerto Rico in the years leading to the crisis,” including “possible market manipulation, conflicts of interest, trading practices and fraud” in the management of Puerto Rico securities. They highlight how the Dodd-Frank Act of 2010 and the Securities Exchange Act provide for the protection of municipal entities, and further ask the SEC chairwoman about recent efforts to reform the U.S. municipal bond market.

BondBuyer reported that White told the U.S. Senate Banking Committee on Tuesday that the SEC remains “very focused” on the matter, seeking violations to the securities law.

Meanwhile, Fidelity Investments, MassMutual’s OppenheimerFunds and UBS are being investigated by Massachusetts Commonwealth Secretary William Galvin over their strategy in marketing mutual funds with Puerto Rico debt, Reuters recently reported.

Galvin’s probe is aimed at determining whether the companies properly disclosed the risks involved to Massachusetts investors. While the three companies were the first to be contacted by Galvin’s office over the matter, more firms could soon join the list, according to Reuters.

After more than a year of plummeting Puerto Rico bond prices, they have been rallying as of late, following passage of federal legislation in the U.S. House that would tackle the island’s fiscal woes. The Puerto Rico Oversight, Management & Economic Stability Act, or Promesa—currently pending the U.S. Senate’s consideration—seeks to establish a board that would manage debt-restructuring tools and efforts toward the island’s fiscal stability.

While Congress is expected to ultimately pass the legislation with bipartisan support, the group of senators believe the SEC should take a closer look at the matter, and “immediately commence an investigation into the acts, actions and activities in connection with the underwriting, sale, distribution and trading of Puerto Rico debt,” the letter reads.

“Without this, there is a risk that investors will not regain confidence in Puerto Rico’s debt markets and [the commonwealth’s] access to normal credit markets will remain impaired,” the document further states.

Two weeks ago, the Puerto Rico Commission for the Comprehensive Audit of the Public Credit  unveiled a preliminary report in which it questions the validity of a couple of recent debt issuances by the commonwealth, while urging for the need to receive the necessary funding to continue its auditing process.

Meanwhile, the administration of Gov. Alejandro García Padilla insists on solving the island’s debt problem, once and for all, through a broad debt-restructuring deal that would target $50 billion worth of Puerto Rico’s debt. Officials say talks with creditors continue in an effort to reach agreements over the restructuring plan’s economic terms and short-term relief amid the more than $1.5 billion in debt-service payments that hit the commonwealth July 1.

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